Thursday, June 2, 2011

Salcon ... Jun11

Inet research

1. 1QFY11 Results Highlight
 Although Salcon reported a marginal 2.2% decline in turnover to RM110.4m in 1QFY11, net profit declined by 22.6% to RM4.3m.

 The lower profit performance was mainly due to lower Construction and Concession margin. In 1QFY11,
EBIT from its Construction Division declined by 39.8% to RM3.3m (from RM5.5m in 1QFY10) while
Concession Division saw a slight 9.0% decline in EBIT to RM4.5m (from RM4.9m in 1QFY10).

 Its Construction Division experienced a decline in profit margin due to lower-margin jobs. Salcon’s
Concession Division seasonally reports a lower earnings performance in 1Q and traditionally performs
better in 2Q and 3Q. In addition, the lower profitability in 1QFY11 was also due to start-up expenses.

 Finance cost nearly doubled in 1QFY11 due to heavy capex of around RM150m in FY10.

2. Earnings Outlook
 Annualised net profit for 1QFY11 is 18% below our earnings forecast for FY11. However, we are
maintaining our earnings forecast for FY11, as we believe its current profit base has yet to reflect its full
potential and the design capacity of the Concession segment, as some of its WTPs have yet to commence
operations.

 We expect Haining WTP which was commissioned in 4QFY10 to contribute more meaningfully in
2HFY11 due to the doubling in capacity. In addition, the progressive commissioning of its other
concession assets such as Changle new WTP, Changle Raw Water, Nan An Raw Water and Yizheng
Water Supply that will only come on stream towards the later part of FY11.


 In addition, Salcon also secured another concession contract in Mar-11 for the Changzhou Southeast
Industrial Wastewater Treatment Plant (Changzhou Southeast Industrial WWTP). This Changzhou
Southeast Industrial WWTP with a capacity of 30 MLD would expand Salcon’s total capacity to 995
MLD.

3. Valuation and Recommendation
 We are maintaining our Buy recommendation on Salcon for the earnings growth in FY12-FY13 arising
from the doubling in production capacity towards the latter part of FY11.

 The stock is currently trading at 26% discount to its NTA of RM0.78/share. The stock is currently trading
at P/Es of 13.1x and 10.0x for FY11 and FY12.

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